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Best Dividend Growth Stocks by Potency Score For February

The Potency Score System, which I introduced last October, is a stock rating system particularly for dividend growth stocks. It uses a multitude of fundamental data and metrics and their interrelations to calculate and assign a Potency Score to each dividend stock, thereby producing a ranked list of stocks. Empirical data as well as theoretical concepts are applied throughout the system.

The Potency Score is a measure of the long term dividend return potential of a company. It encapsulates a company's most important fundamental metrics into a single rating, allowing easy comparison between companies. The higher the score, the higher the long term dividend returns. A good way to get a feel for the Potency Score is to view it as a relative forecast of a stock's seven-year yield-on-cost.

These companies tend to have been paying dividends for many years and consistently increasing it. Since sustaining and growing dividends requires earnings growth, these companies tend to produce respectable capital gains as well.

The system's methodology has been continuously evolving and now has little resemblance to its initial version. This month's list of stocks with the highest Potency Scores is the product of the new version 5.0.

For those who prefer a less hands-on investment approach I have published another equities investment strategy using Exchange Traded Funds (ETFs) instead of individual stocks, named The Immortal Portfolio,

New System Enhancements

There are several enhancements to the methodology in the new version 5.0 from last month's version 4.4. The newly added metrics are:

  • Dividend to Free Cash Flow Ratio (TTM)
  • Price to Cash Flow (1-year and 3-year)
  • Years of consecutive dividend growth

Additionally, the fine tuning and refining of the various parameter weights and calculations is ongoing.

The Metrics

The Potency Score System (version 5.0) uses the following metrics, both individually as well as in combinations with other variables.

  • Current Dividend Yield
  • Dividend Growth Rate (DGR) for 1-, 3-, 5-, and 10-year periods
  • Dividend to Free Cash Flow Ratio (TTM and 5-year average)
  • Return on Equity (ROE) (TTM and 5-year average)
  • Return on Assets (ROA) (TTM and 5-year average)
  • Revenue Growth (1-year and 3-year)
  • Projected annual Earnings per Share (EPS) growth rate for the next five years
  • Payout Ratio
  • P/E Ratio (TTM, Forward, and 5-year average)
  • Price to Cash Flow (1-year and 3-year)
  • Debt to Equity Ratio
  • Years of consecutive dividend growth

Additional metrics are under study and examination and will be introduced into future versions of the System.

Sources of data - I have expanded my sources of data. The four DGRs for 1-, 3-, 5-, and 10-year periods and the $dividend amount continue to come from David Fish's invaluable CCC List. The rest of the data come from various public financial sources, including Fidelity Investments, TD Ameritrade, Yahoo Finance, Google Finance, Morningstar, etc. I have tried to use the most reliable sources, and where data was unavailable at one source, I have tried to obtain it from another.

Some Notes About The List

Champions not at the top - I have been asked why great dividend stalwarts such as Procter & Gamble (PG), Johnson & Johnson (JNJ), and McDonald's (MCD) don't make it near the top of the list.

All the metrics mentioned earlier contribute in various degrees to the final score. Some of the reasons these and other solid dividend growth companies are not near the top include the effects of growth metrics (PG and JNJ), valuation metrics , and low current yield (IBM, Colgate-Palmolive (CL), Wal-Mart (WMT)).

Future Champions - The system methodology is somewhat biased favorably towards larger companies via absolute amount of free cash flow and years of consecutive dividend growth. However, the smaller companies that make it near the top deserve a serious look since they could be among the future dividend champions, if not already.

Here are the top 25 stocks for this month. To see the rest of the list please see my blog, here.

Top Stocks For February

Data as of close Friday, 02/03/2012

Sym

$Price

Potency

Score

Ver. 5.0

%Div

Yield

(fwd)

% ROA

P/E

Ratio

(fwd)

% Div /

FCF

% Payout

Ratio

LMT

82.32

27.70

4.73

8.34

10.80

55.78

37.03

STRA

108.80

26.77

3.38

31.80

16.14

45.13

42.79

BBL

67.33

26.57

2.89

22.98

13.28

29.18

21.32

INTC

26.42

25.13

3.14

18.14

11.38

41.87

31.59

BHP

79.44

24.86

2.46

22.98

15.53

30.90

21.32

NVS

54.36

24.61

4.22

7.76

14.74

47.55

52.81

AZN

48.15

23.33

5.68

14.35

7.92

51.79

37.21

DX

9.26

22.80

12.19

1.00

7.29

n/a

106.55

EOC

46.89

21.49

4.11

8.84

12.55

0.12

n/a

ACN

57.34

20.69

2.32

14.48

18.05

27.72

34.85

MSFT

29.53

20.62

2.65

21.30

11.20

25.04

24.67

WAG

33.36

20.44

2.67

9.89

11.85

40.45

27.15

COP

68.21

19.81

3.75

7.27

8.42

48.05

32.48

TJX

68.14

19.68

2.20

16.85

8.70

32.91

19.66

NTT

25.03

18.41

3.31

2.59

0.13

0.22

14.86

NPK

97.72

17.75

8.08

15.30

12.37

130.60

12.12

MDP

31.49

17.56

4.40

7.44

13.53

45.73

44.34

RCI

38.45

17.43

3.59

8.82

11.79

47.63

48.68

GES

30.00

17.32

2.51

17.17

10.13

32.88

27.02

DCM

17.78

16.53

3.84

7.22

0.17

0.51

23.19

RTN

47.99

16.50

3.51

7.53

9.51

48.55

32.82

NVO

119.18

16.41

1.40

21.36

4.54

5.73

25.04

ABT

54.15

15.68

3.49

7.78

10.98

35.49

63.16

99.05

15.26

2.80

15.47

17.45

64.13

47.88

MDT

38.57

14.71

2.41

10.18

11.59

27.37

29.53

The table columns are: Stock symbol, $Price, Potency Score (Ver. 5.0), %Dividend Yield (forward), %Return on assets (trailing twelve months), Price to earnings ratio (forward), %Dividend to free cash flow , %Payout ratio .

Source: Best Dividend Growth Stocks By Potency Score For February

Additional disclosure: I may initiate a long position in any of the stocks or funds discussed over the next 72 hours. Disclaimer: Please do not treat this as a buy or sell advice. These are my opinion and ideas, not advice. Please do your own due diligence.